There are some good points being made here. There are some major macro events that are almost assuredly happening in the next two/five/ten years that will have some dramatic effects on the real estate market. I'll cover a few of them.
1. Low Returns
2. Low Rates
3. Demographics
4. US Federal Government Balance of Payments Crisis
5. Private Sector Debt & Asset Price Bubble
All of these variables tie to the others in some way or another and it can be abstract. But here is my best breakdown.
1. Low Returns
It's very hard to discern because of the sheer amount of noise in markets (international trade development, explosive technological advancements, changing demographics, change in geopolitical circumstances, change in banking regulations), but the US economy has been fundamentally weakening over the last fifty years. There exists an array of reasons that it wouldn't always appear to be weakening, but it has been. It started when the US went off the gold standard in 1971 (and in reality, the gold standard had really been breaking for a decade or so leading up to the official closure of the gold exchange window by Nixon). This is not to say that the solution is the reimplementation of a gold standard, but it is to say that our perception of strength in markets (which is in dollar terms) was obfuscated as the dollar was no longer a consistent store of value across longer periods of time. Now, throughout the last fifty years, and especially in the end of the 20th century, the US Dollar was the global currency. This meant that everyone needed dollars to facilitate their global trade transactions. This creates a tremendous dollar demand which essentially permits the US to add dollars to the system via the Federal Reserve and the banking system and have those dollars eventually be fully kneaded into the global economy. The net result over time is that billions and even trillions of dollars worth of foreign manufactured goods were sent to the US, and all that the US had to give them in return was green paper that were created just by printing. What this means, however, is that the domestic manufacturing base has to be hollowed out. It puts dollar-rich domestic manufacturers into competition with comparatively dollar-poor foreign manufacturers. This problem is what's referred to as Triffin's dilemma. Which essentially presents the problem that when a nation hold the global reserve currency, its domestic productivity has to constantly fend against the entire world, which is usually in a hungrier position. Over time, this usually means the nation that wants to maintain its living standards has to further draw from the strength of (international demand for) the currency in order to offset their fundamental weakness. We have been doing exactly that. We don't produce enough to keep up our standard of living. The other store of value that we have exported in order to maintain our consumption is US Treasury's. The global settlement asset. As a result of doing this, our net international investment position (how much foreigners owe us minus how much we owe foreigners) has gone from 0 in 1990, to -15% of GDP in 2005, to -30% of GDP in 2011 to almost -50% last year in 2019. What this means is that we've been bolstering our economy using more and more money borrowed from foreigners. And we can get away with this because...
2. Low Rates
The US is not the only economy that is fundamentally weak. Because the US is not a closed economy. The US economy is really better regarded as the global economy, but where the Americans have an outsized ability to decide how it is organized. The reality is though that buying power flows to assets that will produce the best return. This is reflected in interest rates. The Federal Reserve facilitates the introduction of credit into the economy at an interest rate known as the Federal Funds Rate. Interest rates roughly reflect the return an economy can produce. If the market is borrowing money at a rate of around 5%, it means that market participants are have uses for that money that they expect will return 5% or higher. That is good, that's respectable growth. Now, if you watch the FFR over the last half century, you see that the Federal Reserve has constantly targeted and worked to achieve a lower and lower FFR in order to make it easier for banks and by extension businesses to borrow. When the US got a handle on interest rates in the early 1980's, market rates were up as high as 20%. To us this would seem incomprehensibly high. Well, tracking the decline in fundamental growth, these rates slowly fell and then they crashed into the floor in 2008 and the system has been trying to find release valves since. We no longer have real growth opportunities. Interest rates would even like to be lower than they already are, but the economy has been subconsciously rearranging itself, borrowing more and more against the future in order to stimulate more growth in the present. The Federal Reserve has tried three main times since 2008 to try and raise rates in the hopes that the economy would perk up and agree that it is a 5% returning economy, but every single time we start raising rates even above 2%, a wheel pops off somewhere and the Federal Reserve has had to capitulate and lower them again. Low rates (usually) enable more lending. And lending is how most money is created. Most people think that Federal Reserve money printing is inflationary, but that's not exactly correct. Mostly, money is created when it is loaned into existence by a financial institution. It's a little difficult to wrap ones head around, but the main point is that most money is based off of a debt that someone else owes. And this directly involves real estate, of course. Because we apply some 80% leverage to most of our investments. Low rates have been needed in order to keep things moving. And even despite low rates, Americans are still struggling to make ends meet. We've had auto-delinquencies up at high levels despite banks lending at 6, 7, and 8 years just to try and make it more affordable. Essentially, rates have been kept low in a bid to keep the loans coming out. But they are still not workable. The banks still need to be able to make money on those rates. They can't really make money if they can't make at least around 2% interest. And in many cases, there might just not be enough 2% or better returning projects around. As a result, the loans won't be made. And if the loans aren't made, then the money creation doesn't continue. As a result the rocket will run out of fuel and sellers will have to start pricing their homes to accommodate what the buyers can actually afford in terms of monthly payments. This is hugely bearish for home values.
3. Demographics
We have 10,000 baby boomers turning 65 every day. And this will continue for some 15 years. As they retire, they will begin to sell their assets to finance their lifestyles. Starting with their houses. They have been huddled around places like New York City and Chicago in these beautiful suburbs with $1.3MM homes. They live in these places and have used the tremendous fifty year long credit expansion I cited to buy/build-up massive communities worth of houses in these places. Because it was close to where they worked. That's it. Once they no longer have to work and instead they have to have their 20+ year retirement fully planned out, you bet they will be selling their overpriced homes in places like the northeast and relocating to where it's warmer and cheaper and lower tax. Think of Texas, Florida, Nevada, Arizona. These states all have at least some cheap real estate. All of them but Arizona have no income tax. And this is why real estate isn't a monolithic asset class. It needs to be evaluated meticulously and with a multitude of variables in mind. The boomers really thought that life would be 9-5 in an office, pretty wife, pretty house, 401k, buy a timeshare, 2.3 kids going to good schools, and then having a comfortable golf retirement in Florida at 65. They thought that this is what American life was going to look like pretty much forever. In fact, so assured in it were they, that they ruined our economy and saddled us with government debt and student debt, as well as ruined our housing market in order to finance it.
4. US Federal Government Balance of Payments Crisis
Our public debt is altogether too much. Even disregarding the states and municipals, the US government will finish this year some apocalyptic $30T in debt. As explained regarding interest rates before, the government has been borrowing at what can only be described as a de minimis rate of interest, with most Treasury debt financed in under twelve month terms and at a rate of 1.5% (and in the last few months, these rates have gone down under 0.25%). With public debt over 120% GDP, the government is essentially beholden to this low interest rate environment. And mind you this is not as times are good. We are not economically strong. That would be one thing. It's a whole different story being that we have tensions at an all-time high. Middle Americans are in more pain than ever on one side of the argument, and rioters in the inner cities are demanding healthcare, minimum wage increases, affordable housing, and other dispensations on the other side. And in the meantime, those boomers are going to be going on Medicare and social security and consuming those resources. Healthcare is about 17% of the economy, so this has serious implications for what the government provides to people. This bill essentially can't be paid. This is where the inflationistas are actually correct. While the undercurrent is deflationary (lower rates, lower returns, more pain), the US government will eventually force its way out of its debt problem by requiring the Federal Reserve to print the difference. The people are demanding what they've been told they could have. And they're going to refuse to elect anyone who won't give it to them. This is what people don't understand about politics. The milquetoast neo-cons and neo-libs are going to be squeezed to death. It's already underway, in fact. As we've seen with Trump, the Republicans have already replaced their stuffy Washington insiders with a bombastic populist who will say what he feels needs to be said and who will tackle the issues that his constituency are vocal about. "Opposite" (and that isn't really the correct term) Trump is Bernie Sanders and even the more out-there side of the Democract Party. The AOC's, the Andrew Yang's and the Ilhan Omar's. These people are requiring that the government directly and explicitly address the issues facing their constituencies. These politicians are not going away. They are what the future of politics will look like. And in their efforts to deliver on their promises to keep Americans fed, in homes, in work, etc., they will ultimately hijack monetary policy and make it such that the government can print all of the money it needs in order to give it directly to the people. This is what will ultimately cause inflation. And this will have an explosive effect on real estate. Because real assets become more valuable in inflationary episodes while debt instruments become cheaper. Imagine taking out a 30 year mortgage on a rental property and then over the course of five years, enough money is introduced into the system to double consumer prices. You're charging double the rent, many of your costs will increase as well, except your mortgage payment will remain the same. Meaning you get to keep the difference. Hugely beneficial for real estate.
5. Private Sector Debt & Asset Price Bubble
Presently, the debt held in the private sector is over 200% GDP. It's found that over 180% tends to be a point of no return for financial disaster. We are dealing with extremely high levels of debt. Now, given those low rates cited before, larger companies have been making use of these low financing opportunities and using the money to turn around and buy back their stock - thereby increasing their share prices. Unfortunately, a lot of this is due to the moral hazard of executives seeking to just increase company share price because that is one of the chief metrics of their performance (and thereby, their bonuses). But a part of it is simply that the American consumer is mortgaged to the hilt; the foreign private sector is strapped for cash too. There isn't enough positive economic activity for these large companies to make money on. So buying back their shares would appear to make the most sense as something to do with cheap financing while they hope some more economic opportunity pops up down the road. More than that, there are a number of private pension programs and insurance programs that need to shoot a ~6.5% annual return in order to meet their obligations. In a super low interest rate environment, they can't meet this target as the rates on the bonds they hold keep declining. So they have actually increased their equities exposures in a sort of Hail Mary attempt to grab some more yield. What this results in are extremely high price to earnings ratios. That is to say that the markets are overpaying for the productivity of the companies in which they are buying stock. This often means that they are buying to try to participate in asset price appreciation rather than fundamental growth. This means that the stock market being at these astonishing highs is really just part of a bubble.
The main point that I think should be taken from this is that we are in an "everything bubble". And this absolutely includes houses. Probably in a pretty big way, considering the amount of leverage that is involved. I think all of American life will change. If you can buy houses in the sweetspot bottom, you'll be in a great position. Because rates will be low when you buy and so will prices. And then we'll probably be facing a strong and sustained inflationary impulse as well as asset price appreciation following that. Things are definitely going to get rough, so keep all of this in mind. And learn/follow macroeconomics if you can.
